stockholder derivative suit

A lawsuit filed by one or more of a company's stockholders in the name of the company. A derivative suit is filed when the firm's management will not or cannot sue in the name of the company. For example, a stockholder may enter a derivative suit against the firm's chief executive officer to recover funds from a questionable or an improper act by that officer. Also called derivative suit.

Most cybersecurity breach litigation today falls into one of four categories: 1) shareholder derivative suits to recover for losses in stock value; 2) securities fraud class actions to recover for the diminution in stock value following a cyber breach; 3) class action lawsuits by the breached company's outside customers or business partners whose sensitive or personal information was compromised during the breach; or 4) enforcement actions by governmental agencies invoking their regulatory authority under relevant state or federal laws.

Fallout from the hack not only prompted the ousting of Target's chief executive officer, Gregg Steinhafel, but it also spawned at least two shareholder derivative suits against the company and its directors and officers, and prompted proxy firm Institutional Shareholders Services to recommend that investors remove seven board members for allegedly breaching their fiduciary duties by failing to protect the company from the breach.

Compliance programs also help demonstrate that officers and directors are fulfilling their fiduciary duties to shareholders by adopting proper procedures for corporate legal compliance, and can be useful in defending shareholder derivative suits that may arise following export violations.

(12) CalSTRS sought to overcome the demand requirement by pleading demand futility because the directors, having already ignored the need for an investigation, were now "incapable of impartially investigating or taking appropriate action against themselves and others." (13) In fact, multiple shareholder derivative suits against Wal-Mart make similar allegations and are still in pretrial stages at the time of publication: seven in Delaware and five in Arkansas state and federal court.

(213) Then, in 1997, the Osaka High Court issued what many academics view as a watershed judgment that "served to check a growing tendency by courts to grant liberally defendants' motions for security for expenses." (214) Several prominent scholars opined that the tightening of security for expense awards "set an important precedent for further expanding the use of shareholder derivative suits." (215)

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